Rallying copper prices normally point to economic expansion. So, does the fact that the base metal has hit a 5-month and a pre-pandemic high suggest global demand is about to surge higher?
I am not so sure.
Granted, Chinese demand has rebounded, and the manufacturing PMI remained above the boom/bust level of 50.0 again in June, pointing to slightly rising economic activity.
However, I fear the rise in copper is more to do with supply disruptions and short-coving of speculative bearish bets than hopes over a major economic recovery. Indeed, supply fears remain elevated because of coronavirus wreaking havoc in Latin America, with copper mines being concentrated in Chile and Peru.
But whatever the reason, copper prices have broken higher and that’s what matters in so far as short-term trading is concerned, not the cause of the breakout. The key question is whether today’s breakout will hold or not:
Source: TradingView and ThinkMarkets
If copper manages to close above the recent highs of $2.7000 and at worst Monday’s peak of $2.6870, then the path of least resistance would remain to the upside. Any move back below this range would put the bulls in a spot of bother, especially if Monday’s low breaks down later on in the week.
So, on the chart, I have laid out a few scenarios that could play out for both the bulls and the bears. If the bulls manage to sustain the breakout then the next objective would be around $2.7500, which was a key support prior to the breakdown earlier in the year. However, if the breakout fails and price goes back below Monday’s low of $2.6500, then as a minimum I would expect a revisit of the long-term bullish trend line which comes in around $2.5600-$2.6000 depending on how fast it will get there (if it does at all).